Coherent Diversification Measures in Portfolio Theory: An Axiomatic Foundation

Nettey Boevi Gilles Koumou () and Georges Dionne ()

No 7, Working Papers from Africa Institute for Research in Economics and Social Sciences

Abstract: We provide an axiomatic foundation for the measurement of correlation diversification measures in a one-period portfolio model. We propose a set of nine desirable axioms for this class of diversification measures. We name the measures satisfying these axioms coherent correlation diversification measures which we distinguish from coherent risk measures. We provide the decision theoretic foundations of our axioms by studying their compatibility with investors¡¯ preference for diversification in rank-dependent expected utility theory. We examine some of the most frequently used methods for measuring correlation diversification in terms of our axioms. Lastly, we explore whether our axioms have a representation function.

Keywords: Portfolio Theory; Portfolio Diversification; Preference for Diversification; Correlation Diversification; Rank-Dependent Expected Utility Theory (search for similar items in EconPapers)
JEL-codes: D81 G1 G11 (search for similar items in EconPapers)
Pages: 53 pages
Date: 2021-06
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Related works:
Journal Article: Coherent Diversification Measures in Portfolio Theory: An Axiomatic Foundation (2022)
Working Paper: Coherent diversification measures in portfolio theory: An axiomatic foundation (2019)
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